Hi everyone. Below is a quick summary of the COVID-19 legislation that affects retirees. Before jumping into that, a quick apology. Sorry I haven’t written much lately. January and February are normally very busy months for me as I meet with clients for annual reviews. Just as that was wrapping up, the world (and markets) went haywire with the pandemic and I’m just now coming up for air.
New Rules That Affect Retirees
The coronavirus stimulus packages contain something for (almost) everyone: businesses, individuals, students and yes, retirees. I won’t bore you with a comprehensive list, but I’ll give you a quick overview of the elements that impact retirees.
Changes to Required Minimum Distribution (RMD) rules: The CARES Act allows you to suspend RMDs for 2020 from 401(k)s, 403(b)s and IRAs. If your IRA took a hit and you don’t need the money, it’s probably a good idea to skip your 2020 RMD. That will hopefully give your account time to recover from the recent downturn. If you have your RMD set to happen automatically each year, you’ll want to call your adviser or IRA custodian to stop it. If you’ve already taken it for the year, there is a provision that allows you to put it back. Certain restrictions apply, so check with your IRA custodian for details. Also keep in mind that Congress made another change to RMDs at the beginning of the year that pushed the required age from 70 ½ to 72.
Penalty waived for early retirement withdrawals: Normally, you have to pay a 10% penalty if you take a distribution from your IRA prior to age 59 ½. That penalty is waived for 2020 on amounts up to $100,000 for anyone affected by COVID-19 (e.g. sickness, job loss, reduced hours, etc.). You’ll still owe taxes on the distribution, but you can spread the taxes out over three years. And if you end up not needing some or all of the money, you can put it back into your IRA within three years and that contribution won’t count toward your annual contribution limit.
Stimulus checks: Even if you’re retired and not working, you may still be eligible for a stimulus check. The CARES act provides one-time payments of $1,200 for individuals and $2,400 for couples. The benefit begins to phase out at adjusted gross income of $75,000 for single filers and $150,000 for those married filing jointly. They phase out completely at $99,000 for singles and $198,000 for married filing jointly. Initially, people were required to file a 2018 or 2019 tax return in order to receive the benefit, but many retirees are not required to file a tax return, so the government now says it will look at SSA-1099 benefit statements. If you are receiving Social Security and are eligible for the benefit, the government will send out your stimulus check automatically in the same manner that you receive your regular benefits (likely via direct deposit).
Expanded loans from qualified plans: If you have a 401(k) or other qualified plan, you can now borrow 100% of your vested account balance, up to a maximum of $100,000. The deadline to initiate the loan is September 23, 2020. If you already have a loan outstanding, you can delay repayments for up to one year.
Delayed tax filing deadline: The due date for filing federal income tax returns (and paying any balance due) has been moved from April 15, 2020 to July 15, 2020. This extension applies automatically to all taxpayers and you don’t need to file any additional forms to qualify. The delay applies to 2019 returns as well as estimated tax payments for Q1 of 2020 that would otherwise have been due on April 15. If you’re still unable to file by July 15, you can file for a normal extension using Form 4868. Keep in mind that the regular rules still apply to that second extension (i.e. it extends the due date of your filing, but not the due date of any taxes due). Not all states extended their filing deadline, so be sure to check your state’s deadline to make sure you file on time.
Delayed mortgage payments: The CARES Act allows certain borrowers to delay their mortgage payments for up to a year. Be careful with this provision, however, because depending on who owns your mortgage (your bank or another servicer), you may be allowed to tack the payments onto the end of the loan or you may be required to pay all of your back payments in a lump sum at the end of the forbearance period. Check with your mortgage provider for details.
Medicare and COVID-19: Under earlier legislation (the Families First Coronavirus Response Act), health plans are required to cover COVID-19 testing at no cost to the patient. If you’re already on Medicare, it provides coverage as well. Medicare will cover COVID-19 testing and also covers hospitalization and treatment. In addition to these benefits, Medicare has expanded its coverage of telehealth benefits. For more information on all these things, visit https://www.medicare.gov/medicare-coronavirus.
These are definitely unprecedented times. Stay safe and touch base if you have any questions or if there’s anything I can do to help you.
Deciding when to retire isn’t always easy. Most people just base it on their birthday, but there are other factors you should consider as well. In the video below, I’ll give you seven signs that you’re ready to retire.
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Who says Congress can’t act quickly when they need to? Just last week they rapidly (after much previous delay) approved budget legislation to narrowly avoid a government shutdown. Unfortunately, buried deep in the pages of that budget—probably somewhere between synchronized swimming studies on Sea Monkeys and a real life iron man suit (actual expenditures in previous budgets)—was a provision that ends two popular and lucrative Social Security claiming strategies. What are the changes to your Social Security claiming options and how will they affect you?
Change #1: Restricted Application for Spousal Benefits
Prior to the change, a person who was eligible for both a benefit based on their own work record as well as a spousal benefit based on their spouse’s work record, could choose to file a restricted application for only the spousal benefit at Full Retirement Age. This would allow their own benefit to continue to grow by earning delayed retirement credits. Then at some future date (as late as age 70), when their own benefit had grown to exceed the spousal benefit, they could switch to the larger benefit. The new law gradually phases out this option.
Those born on or before January 1, 1954 will continue to have the option to file a restricted application for spousal benefits. Those born after that date will not. In other words, if you’re 62 or older by New Year’s Day 2016, you’ll still have the option to file a restricted application once you reach Full Retirement Age (66 for those born between 1943 and 1954). If you’re younger than 62 on New Year’s, it’s Auld Lang Syne for the restricted application option. It should be noted that this change does not affect the ability of widows to file a restricted application for widow benefits and later switch to their own benefit.
Change #2: File and Suspend
Under the old law, there was a strategy called “File and Suspend” whereby a person could file for their benefits, but choose to immediately suspend payment of those benefits. Why would someone do that? The answer lies in the fact that you need to claim your own Social Security benefits before anyone else can claim benefits based on your record. In other words, you need to claim your benefits before your spouse can claim spousal benefits based on your record. But what happens if it makes sense for your spouse to file now, but you want to delay filing so you can continue to earn delayed retirement credits? Enter the “have your cake and eat it too” File and Suspend strategy, which allows your spouse to go ahead and claim benefits on your record while simultaneously allowing you to continue earning delayed retirement credits.
Under the new law, anytime a person suspends their benefit, it will automatically suspend payments to anyone else receiving benefits based on that record. This effectively eliminates the File and Suspend strategy going forward. About the only time it will make sense to voluntarily suspend will be if you change your mind on claiming your benefits and want to suspend payments so you can start earning delayed credits again. The new voluntary suspension rules take effect 180 days after enactment of the new law, which is approximately May 1, 2016.
What actions should you take as a result of these changes? For many people, losing these strategies will mean lower lifetime Social Security benefits, which could mean drawing more from savings or delaying retirement altogether. If you’ve done a Social Security claiming analysis on your own or with your adviser, you should review that analysis to see if the new law warrants a change in strategy. And if you haven’t yet done an analysis, but retirement is right around the corner, now is the time to review your options. The clock is ticking.
As always let me know if there’s ever anything I can do to help. And if you have any questions about the new rules, feel free to post them in the comments section of this article and I’ll do my best to answer them.
When it comes to retirement, your bank account is more important than your birthday. Even so, there are several key retirement ages that you will want to keep in mind as you plan.
Age 50: Once you hit the big 5-0, the government raises the contribution limits on your IRA and 401(k). For those turning 50 in 2013, you can put an extra $1,000 into your IRA and an extra $5,500 into your 401(k). That raises the contribution limits to $6,500 and $23,000 respectively. These “catch-up” contributions can be great if you still have some ground to cover in order to reach your savings goal.
Age 55: If you plan on retiring earlier than most, 55 might be a good target. That’s because there is a provision in the tax code that allows you to take early distributions from your retirement plans at age 55 without paying the usual 10% penalty. These are called 72t distributions and, as you might expect, certain rules apply. Work closely with a trusted adviser if this is an option you’re considering.
Age 59 ½: This is the magic age where the government allows you to start taking distributions from your retirement plans without paying the 10% early withdrawal penalty.
Age 62: This is the earliest date that you can elect to receive Social Security benefits. As I said in a recent article, however, claiming Social Security at age 62 is like buying a pair of leather pants: almost always a bad idea. Claiming at 62 would result in a 25% permanent reduction in your benefits. The longer you wait, the more you will get.
Age 65: This is the age that you become eligible for Medicare. If you’re already receiving Social Security benefits by your 65th birthday, you’ll be automatically enrolled in Medicare. If not, then you’ll need to actually sign up. You will have a 7-month window to enroll: 3 months before your birth month, your birth month, and 3 months after. Sign up in that window, because there are penalties if you sign up late.
Age 66: Most baby boomers can receive full Social Security benefits at age 66. Depending on when you were born, however, you might be able to get full benefits a little sooner or have to wait a little longer. Check here to see when you will be eligible for full benefits.
Age 70: Just like the Social Security Administration reduces your benefits if you retire early, they increase your benefits if you retire late. For those born after 1943, you get an extra 8% for every year you wait past full retirement age up to age 70. After age 70, there’s no benefit for waiting. Said another way, claiming Social Security benefits at 62 will result in the smallest check and claiming at 70 will result in the biggest check.
Age 70 ½: One of the key benefits of your retirement accounts is that they grow tax deferred. Uncle Sam can’t wait forever, though. Congress needs money to fund all those brilliant schemes that they’re always hatching. So at 70 ½ they start forcing you to take required amounts from your retirement accounts each year. Work closely with your adviser to determine your Required Minimum Distributions (RMD), because there is a 50% tax penalty on any amount that you should have taken, but didn’t. The RMD rules don’t apply to Roth IRAs.
~ Joe
Photo by louderthanever. Used under Creative Commons License.
No, you didn’t miss the memo. The government hasn’t announced any plans to cut Social Security. At least not overtly. They have, however (in my opinion), been covertly reducing the value of Social Security payments for years. How?
In order to account for inflation, Social Security payments have a cost of living adjustment built in. If inflation (as measured by the Consumer Price Index) is 3 percent, payments are increased by 3 percent. This works great and everyone is happy, as long as the inflation estimate is accurate. If the government underreports inflation, however, then the raise they give you isn’t enough to offset the increase in prices.
As you may have guessed, many people believe this is happening. There have been several changes to how the government calculates inflation over the years, all of which have had the same affect: To reduce the reported inflation rate. The current Consumer Price Index (CPI) is currently around 2%. Using the methods in place prior to 1990, that number is closer to 6%. Using the methodology in place prior to 1980, that number is closer to 9% (See chart below from shadowstats.com).
I don’t know about you, but when I reflect on my expenses over the last year—property taxes, groceries, cable bill, gas, health insurance—it’s fairly evident that they increased by more than 2%. What if the actual rate of inflation is closer to 6%? How will that affect a person receiving Social Security benefits? It doesn’t take a genius to see that, if inflation is 6% and the government gives you a 2% raise, they have effectively cut your benefits by 4%. If that same pattern repeats itself for 10 years, the purchasing power of your benefits will have been cut by about a third. They are giving you more money, but that money buys less.
Warren Buffet And the Widow
All of this reminds me of a story that Warren Buffett once told about an elderly widow with a passbook savings account.
“The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures. The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her savings in a 5% passbook account whether she pays 100% income tax on her interest income during a period of zero inflation, or pays no income taxes during years of 5% inflation. Either way, she is “taxed” in a manner that leaves her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous a 120% income tax, but doesn’t seem to notice that 6% inflation is the economic equivalent. If my inflation assumption is close to correct, disappointing results will occur not because the market falls, but in spite of the fact that the market rises.”
Applying that same logic to Social Security, we would find it outrageous if the government cut our Social Security benefits, but seem not to notice that inaccurate cost of living adjustments are the economic equivalent. Disappointing results will happen not because the government cuts our Social Security benefits, but in spite of the fact that they raise them.
The Solution
The best way to overcome this hurdle is to build your own inflation factor into your Social Security benefits. How do you do that? Rather than waiting until full retirement age or later, the average person retires at 62 and takes a roughly 20 percent permanent reduction in benefits. Rather than following their lead, if you wait a few years you can retire on full benefits. Even better, retire a few years “late” and you can add as much as a third to your annual benefit (8 percent per year for those born after 1943 to a maximum age of 70). The annual cost of living adjustment will likely still be understated, but it will be based on a much higher benefit amount.
Before signing off, I just wanted to make clear that I’m not so much criticizing the Social Security Administration as I am the methodology for calculating inflation. As government agencies go, I’ve always felt that the SSA does a good job with the difficult task that they’ve been given. I know that several people who work for the agency read this blog. If you’re one of them, I’d love to hear your thoughts (pro, con or otherwise) on today’s post so we can all understand this issue better. Just leave a comment at the bottom of the post.
[Note: As most of you know, I’m a financial adviser. I use a program called Social Security Timing to help clients determine the best Social Security strategy for their situation. I’ll run that report for free for the first 20 of my readers (that’s you!) who request it. Certain conditions apply, so just email me if you’re interested (joe@intentionalretirement.com).]
Social Security is a major source of income for many retirees. How major? The average retiree gets about 40 percent of their income from Social Security. For older retirees, that percentage surpasses 50 percent. It stands to reason then that we should all want to maximize our Social Security benefits. Here’s how.
Wait
You can choose to claim your benefits early, on time or late. “On time” is also known as your full retirement age and it varies depending on when you were born. If you were born after 1960, your full retirement age is 67. If you were born between 1943 and 1954, your full retirement age is 66. Full retirement increases by 2 months per year for those born between 1955 and 1959 (e.g. 1957 = 66 and 6 months).
If you claim early, your benefits will be reduced by 5/9 of 1 percent per month for the first 36 months and 5/12 of 1 percent for anything over 36 months. For example, a person born in 1950 who claims at 62 instead of 66 will see his or her benefits permanently reduced by 25 percent.
If you claim late, your benefits will increase by 8 percent per year for each year you wait (for those born after 1943). So if you want to maximize your Social Security, it’s usually best to wait to claim until on or after your full retirement age. One instance where it might make more sense to claim early would be if you are in poor health and don’t expect to live very long.
Don’t work
If you’re still working and haven’t reached your full retirement age yet, you should think twice before claiming benefits. That’s because your Social Security check will be reduced by $1 for every $2 you earn above $15,120 (for 2013). In the year you reach full retirement age, the penalty is reduced to $1 for every $3 above $40,080.
Unlike the penalty for claiming early, the work penalty is not permanent. It goes away once you reach full retirement age and your benefits will be increased to compensate you for the prior reduction. But that doesn’t really help you if you claim early thinking you’re going to supplement your paycheck, only to have those benefits withheld because you make too much money.
Coordinate with your spouse
When claiming, both you and your spouse have a variety options. Add to that the fact that you are typically entitled to either the benefits you earned yourself or an amount equal to roughly half of your spouse’s benefit and the complexity multiplies quickly. If you can coordinate your claiming strategies, you can greatly increase your lifetime benefits. I have seen couples increase their lifetime benefits by $100,000 or more simply by having a well thought out, coordinated strategy.
Don’t forget your Ex
If you’re divorced and haven’t remarried, you may be entitled to claim benefits based on your ex-spouse’s record. The primary stipulations are that a) you were married for more than 10 years, b) you haven’t remarried and c) you’re older than 62.
So there are a few ideas for maximizing your benefits. Don’t forget to touch base if you want me to run the Social Security Timing report showing you the best strategy for your situation.
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